The government has allowed Indian companies to issue foreign currency exchangeable bonds (FCEBs) to overseas investors, but only after they satisfy the existing stringent foreign direct investment (FDI) rules and external commercial borrowing (ECB) guidelines.The decision means that companies issuing such bonds would have to comply with sector-specific FDI caps and related guidelines as well as stricter ECB norms, which cap the amount a company can raise, as well as specifies the end-uses for which these funds can by deployed.Companies can issue FCEBs with a minimum maturity of five years and these bonds can be converted into equity shares before or after maturity. “The investment under the (FCEB) scheme shall comply with the Foreign Direct Investment policy as well as the External Commercial Borrowing Policy requirements,” the Finance Ministry said.According to ECB norms, companies can use the proceeds for purposes that include the import of capital goods, modernisation of exiting plants in the real sector, and financing the infrastructure sector (excluding real estate). The tax treatment and interest rates on the new bonds will be as under existing overseas borrowing rules of the central bank.The finance minister, in his Budget speech last year, had announced his decision to put in place an enabling mechanism to permit Indian companies to unlock a part of their holding in group companies to meet financing requirements by issuing exchangeable bonds.
